EU deal may help Spain pass budget, but limit labor reform

All parties hailed the €140 billion allocation to help fight the effects of the coronavirus, but the money comes with conditions that could cause friction between the coalition partners

Prime Minister Pedro Sánchez (C) and Cabinet members celebrate the agreement on the EU recovery fund.
Prime Minister Pedro Sánchez (C) and Cabinet members celebrate the agreement on the EU recovery fund.Borja Puig de la Bellacasa (EFE)

The Spanish government is hopeful that the €140 billion allocated to Spain by the European Union’s coronavirus recovery fund will also help push its own national budget plan through parliament.

Securing congressional approval for its spending blueprint has been an ongoing challenge for the coalition of the Socialist Party (PSOE) and the leftist Unidas Podemos that took over the reins of government in January. Spain is still working with the 2018 budget, which was drafted by the previous conservative administration of Mariano Rajoy, of the Popular Party (PP).

(l-r) Greek PM Kyriakos Mitsotakis, Spanish PM Pedro Sánchez, Portuguese PM Antonio Costa and German Chancellor Angela Merkel.
(l-r) Greek PM Kyriakos Mitsotakis, Spanish PM Pedro Sánchez, Portuguese PM Antonio Costa and German Chancellor Angela Merkel.STEPHANIE LECOCQ (AFP)

The executive is planning to go to Congress with its plan in September, by which time it hopes to have negotiated enough support in a chamber where it holds a minority.

But the EU aid comes with conditions that affect the Spanish government’s pledge to repeal labor legislation from 2012 that made firing cheaper. Brussels does not approve of softening labor market rules, and even the coalition partners have differing views on the matter: Unidas Podemos wants to revoke the 2012 law altogether, while the PSOE talks about revising some of its “most harmful aspects.”

The matter has been repeatedly postponed since January, and now, the executive says that it will have to “find the right moment” to address it.

“Budget of recovery”

Over half of the EU money will take the form of direct grants, allowing the government to draft an expansive budget to help repair the damage caused by the coronavirus pandemic. Spain has been one of the worst-hit countries, with a death toll of over 28,400 and an economy that is expected to contract around 10% this year following a strict three-month lockdown that brought tourism, a major engine of growth, to a standstill.

In turn, getting the budget passed would dispel the threat of a new snap election in a country that has held four general elections between 2015 and 2019.

“It would be hard to understand if [the deal in Europe] did not have a follow-up in the form of a budget to channel those resources to the citizens,” said Finance Minister and government spokeswoman María Jesús Montero following the Cabinet meeting on Tuesday.

Montero also asked all other Spanish parties to get behind what she called “the budget of recovery.” She said that the main opposition PP should put “partisan interests” aside and “play a leading role” in these accounts. Securing support from the PP is unlikely, but Sánchez is hoping to convince the parties that backed his bid to get back into the prime minister’s office last year, and possibly also Ciudadanos (Citizens), a party with ties to European liberals that has alternately sided with the PSOE and the PP in the past.


As the second recipient of aid after Italy, Spain will receive “an extraordinary amount to foment the modernization of the country,” said Montero.

Until now, the government had been facing the conundrum of how to increase public spending on the coronavirus recovery and other issues such as the ecological and digital transitions, at a time when public revenues are down and the deficit could balloon well beyond 10% of gross domestic product (GDP).

The European deal makes everything easier. All parties in parliament, including the PP and Ciudadanos, applauded the EU agreement on Tuesday, although PP leader Pablo Casado (PP) described it as “an amendment to the Spanish government’s policy with regard to its investiture pact with Podemos and its more recent deals with EH-Bildu,” alluding to a short-lived deal with the Basque hard-left party to revise the 2012 labor law.

Indeed, while the terms of the EU agreement will allow the Spanish executive to draft keynesian policies to fight the recession, Madrid’s hands will be tied when it comes to softening existing labor legislation.

Popular Party leader Pablo Casado.
Popular Party leader Pablo Casado.Brais Lorenzo (EFE)

Government and PSOE sources said the executive will seek to push this matter further down on the agenda. But coalition partner Unidas Podemos and the unions want to address labor reform no later than this coming fall. “There could be a source of tension there,” admitted a PSOE source. “But it’s mostly a matter of opportunity: we need to find the right moment, the ideal date, as with other measures that have been delayed by the pandemic.”

Podemos lawmaker Gerardo Pisarello defended pushing forward with the coalition’s pledge. “In the scenario that we find ourselves in, repealing the labor reform, which was a campaign promise and part of the agreement with the PSOE, takes on more urgency than ever.”

But sources in Brussels said that “it makes no sense to go back on reforms that are working.” The European Commission could put the brakes on such initiatives when Spain’s plans come up for periodic review.

Even Deputy PM Pablo Iglesias, who is the head of Unidas Podemos, on Tuesday avoided mentioning the matter. Instead, he said that a key takeaway from the EU agreement is that “not only will it not prevent the coalition government from continuing to implement its program, but it will provide a tremendous stimulus to carry on with transformations aimed at restoring rights.”

Sources from both parties admitted that labor reform may cause some friction between the coalition partners. But an advisor to Sánchez noted that “a summit without a deal would have created a lot more problems.”

English version by Susana Urra.

More information

Recomendaciones EL PAÍS
Recomendaciones EL PAÍS